The present invention broadly relates to the way banking institutions price the charges to maintain accounts with the bank. For example, a customer having a checking account is typically assessed a charge, determined by formula, to maintain the account. For example, if the customer has a checking account that doesn't earn any interest, then the charge might be $5 per month unless the customer maintains a certain minimum average daily balance over the period, in which case the bank will waive the charge. As an option, the customer might be offered a checking account that earns interest with a monthly charge of $8 per month. Again, the monthly charge might be waived if the customer maintains a certain average daily balance in the checking account for the duration of the month.
The present invention also relates to the way banking institutions set rates of interest to be earned by or charged to a customer. Traditionally rates earned are set for each type of account. Thus, for example, if the customer selects a certain type of checking account, the interest in the checking account is going to be 3% (per annum) of the customer's average daily balance.
In recent years, financial institutions have begun to offer a broader range of traditional banking accounts as well as investment and financial services. The traditional marketing approach of banks has been to try to enroll customers in new accounts, typically checking or savings accounts. Then, when the bank offers additional financial products or services, the bank tries to cross sell new accounts to customers having existing accounts with the bank.
This traditional marketing approach is not always effective because financial service is very much an inertia business. Once a customer opens an account, he or she is unlikely to change that account because of the effort involved. Most people don't shop for financial services. Instead, something in a customer's life occurs to cause a customer to make a change or be open to a change. There are moments in life when inertia is overcome; either by moving, death, formation of a family, a customer gets so angry at something that the customer decides to make a change, or some other event occurs. Thus, at the moment a customer opens an account they are open to new components, but it is difficult to open a customer up again. For this reason, cross selling financial services is very difficult. Once a person has a set of accounts, then something's got to happen in their life to cause them to open up another account.
To overcome these obstacles, the focus of the present invention is to build a relationship with the customer rather than opening stand alone accounts for the customer. Studies have shown that as a customer's relationship with a bank broadens, the customer's balances increase. The concept of "relationship pricing" is one way of establishing a long term relationship with a customer. More specifically, financial institutions, especially banks, have recognized that the traditional way of setting monthly charges and interest rates is not entirely satisfactory to customers. Customers do not want to be charged based on an account level. Instead customers prefer to be charged based on the customer's whole portfolio. In theory, this includes at least the amounts the customer has in the customer's checking account, the customer's savings account, the customer's CDs, and the customer's mortgage with the bank. Thus, the notion of "relationship pricing" has recently come into vogue in the banking field.
An article in the Journal of Commerce Lending dated March 1992 titled "Commercial Loan Pricing and Profitability Analys Part II", includes a detailed discussion of the concept of relationship pricing. The article is basically an economic analysis of various commercial loan pricing practices, but discusses relationship pricing in some detail.
An article in the Sep. 23, 1991 issue of "Bank Advertising News", titled "First Union sets strategy after Southeast buy," describes First Union Corp's "move toward relationship pricing." The article does not go into any great detail regarding the specific systems employed.
An article in the Dec. 24, 1990, issue of "Bank Rate Monitor", titled "Corestateshikes loan discounts," discusses Core-States Financial Corps's "new relationship package in all markets." Again, the article simply describes the concept of relationship pricing, but not the systems for implementing the same.
There have been attempts to provide linked account structures in the past. The Citicard account, introduced in 1976 and 1977, was the first account that allowed four or five accounts to be mechanically linked together. A simple transactional account, short term savings, day-to-day savings, and 90-day savings, checking and checking plus line of credit were all linked in the Citicard account. Over the next ten years, other banks copied this approach and began offering "linked accounts," which are essentially transactional banking accounts with some saving components and perhaps a line of credit--a very traditional banking product.
Previous systems implemented pricing schemes that combine at the account to account level, e.g., a checking account and a savings account are linked. These systems have been designed to link (by pointers) other accounts so that, for example, the customer's savings balance is considered in determining a charge for the checking account or the customer's tax deferred money in the customer's 401k could point to the checking account. This was done solely for the purposes of setting the point at which the customer no longer got charged a monthly service fee. Thus, known systems might allow a bank to charge $5 per month for an interest checking account unless the average balance in the customer's checking account was $2,500 or the customer's combined checking and savings account balances averaged $5,000 or the customer's combined checking, savings and 401k investments averaged $10,000 per month.
These known systems were, however, limited to account to account relationship links. As a result, known systems do not incorporate the full individual customer relationship, nor do they recognize the total full household relationship, including, for example, the customer's checking, the customer's savings, the customer's spouse's checking, the customer's spouse's savings, the customer's dependents' checking, the customer's parents' checking, savings and pension.
Current systems and processes for relationship pricing are not entirely satisfactory, however. Known systems and processes do not allow the bank to consider a customers entire relationship with the bank. To fully implement relationship pricing, a bank must truly understand the relationship of a customer to the bank.